Adcore Inc. (OTCQX:ADCOF) Q2 2022 Earnings Conference Call August 11, 2022 10:00 AM ET
Company Participants
Barak Frank – Corporate Secretary
Omri Brill – Chief Executive Officer
Yatir Sadot – Chief Financial Officer
Conference Call Participants
Barak Frank
Good morning, everyone and welcome to our Investor Update Conference Call. All callers are in a listen-only mode. On the call this morning, the company’s CEO, Omri Brill, will provide an update on the company’s operations and strategy, followed by a financial review by Adcore’s CFO, Yatir Sadot, of the company’s Q2 2021 financial statements, after which we will answer pre-sent questions and take questions from participants.
I would like to take a moment to remind participants of the Safe Harbor statement. This conference call contains certain forward-looking statements and forward-looking statements including statements about the company.
Forward-looking information may relate to the company’s financial outlook and guidance, including revenue, gross profit, gross margin, and adjusted EBITDA and anticipated events or results and may include information regarding the company’s financial position, business strategy, growth strategies, addressable markets, budgets, operations, financial results, taxes, plans, and objectives.
Particularly, information regarding the company’s expectations of future results, performance, achievements, prospects or opportunities or the markets in which the company operates; the achievement of advances in and an expansion of the company’s technologies and platforms; expectations regarding the company’s revenue, gross margins and future profitability; the future impact of the COVID-19 pandemic and the Russian invasion of Ukraine and reactions thereto is forward-looking information.
Wherever possible, words such as may, may, will, should, could, expect, plan, intend, anticipate, believe, estimate, predict, or potential, or the negative or other variations of these words, or similar words or phrases, have been used to identify these forward-looking statements and forward-looking information. These statements reflect management’s current beliefs and are based on information currently available to management as of the date hereof.
In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts, but instead represent management’s expectations, estimates, and projections regarding future events or circumstances.
Forward-looking statements involve significant risks, uncertainties, and assumptions. Many factors could cause actual results, performance or achievements to differ materially from the results discussed or implied in the forward-looking statements. Such risks include the factors discussed under the risks and uncertainties section in the company’s quarterly and annual MD&A.
Other factors that could cause actual results or events to differ materially include, but are not limited to, lots of major clients and ability to acquire new clients, significant changes to policies and guidelines of media partners and any significant change to the global business environment and/or in specific territories in which the company operates.
These factors should be considered carefully and listeners and readers should not place undue reliance on the forward-looking statements. Although the forward-looking statements contained in this call and financial results press release are based upon what management believes to be reasonable assumptions, the company cannot assure listeners and readers that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this conference call and the company assumes no obligation to update or revise them to reflect new events or circumstances, except as required by law.
I will now turn the call over to Omri Brill, Adcore’s CEO, to update you on the operations and strategy of the business. Omri?
Omri Brill
Yes, Thank you so much Barak and good morning, everyone. Let me share my screen real quickly. Okay. So let’s jump right into it. So when we look at the quarterly results of Q2 2022, we can see that the topline revenue was CAD5.2 million compared to CAD4.7 million in Q1 2022. That represents an 11% growth quarter-over-quarter, and gross profit was CAD2.1 million in the second quarter compared to CAD2 million in the first quarter. This represented 5% quarter-on-quarter growth. So overall, if you look at the quarterly metrics or the quarterly growth, we should be quite happy with the results. Obviously, we need to compare it to what we had last month — sorry, last year, that can be a bit more negative. But again, the company believes that starting Q4 2021, the results should stand by itself. And the only, let’s say, comparable quarter should be the next Q4.
And equally important, when we look at the gross quality KPIs as we indicated many times before, then if you look at the indirect revenue, we saw that Q2 2022 reached almost CAD1.9 million compared to less than CAD1.4 million in Q1 2022. And then if you look at the entire year-over-year growth, it’s almost 200%. So the company has continued to grow in this very important revenue stream, which comes with higher gross margin and better gross profit as well. And that’s something that we are really happy to see. And that’s, by the way, far exceeding the growth that we see, the quarter-over-quarter growth that we saw, let’s say, in the overall revenue of the company. So this revenue stream is actually growing faster than the rest of the revenue streams of the company.
And if you look at an important geo for us, North America, then yet again, we can see this was the rest of the quarter in Q2 2022, almost CAD1.5 million in total revenue compared to less than CAD1 million revenue in Q1 2022. And again, far exceeding the, I would say, the average growth that we see. So in these two very important KPI for us, we can see that actually, the results for Q2 was really good, and basically, the momentum is there and not only there, it’s actually getting stronger. That’s something that we are happy to report and happy to see as well.
When we look at working capital, then you will see and also Yatir will touch in his review as well. The total working capital in the last quarter actually went down by CAD1.7 million. And the company is looking more on working capital than cash because cash for us is basically fluctuate a bit because of media buying and stuff like that. So when we look at CAD1.7 million working capital loss in the quarter, then one should ask themselves, where this capital loss comes from and the clear answer is, I would say, the two major factors are A, almost CAD50 million buyback to the company did in Q2, and we’re going to touch that in the next slide.
So there’s a massive buybacks that we did during the second quarter. And obviously, the continued investment of the company in the Amphy project as well, which is another CAD0.5 million. So I would say CAD41.7 million drop, CAD1 million is in [indiscernible] and let’s say, CAD0.5 million is at least onetime investments as well. So the company is quite bullish action regarding being able to maintain more healthier working capital in the next quarters.
As I mentioned before, in Q2, the company and also not only the company also insiders within the company, including myself, booked almost three million shares during the quarter, totaling almost CAD600,000 in the money, average price was around 20-something as said. When we bought it, and I think that’s maybe the stronger indicator about where the company believes or how the company see the current share price and where we believe the company is heading for in a sense like action speaks louder than words. And this is, I would say, maybe the strongest signal that you can get from a company and also from insiders within the company regarding what we believe the company direction is, and what we think about the current share price.
So we bought shares and we’ll continue to buy shares if you see this fluctuation or detail between where we think the share price should be and where the share price is and the company is lucky enough to have enough cash in its book in order to support this effort as well.
If you’re going to talk about Amphy, so actually during the quarter, we soft launch all new version of the Amphy website. This is something massive for us. And this is, I would say, the biggest change that we did in Amphy since Amphy was incorporated, I think. So that’s something big that we’ve been working on for the past six months and even more.
And basically will be publicly announced it in September, that’s the plan and especially been just around it. But just to give you a few highlights, and obviously, you can go to Amphy website and see it for yourself. I would say the biggest thing that we changed in the new version of Amphy is A, instead of only one app, which is classes or online process, now we support three different apps, which is classes, kids, and places. So you can do mutual tools in cities, in museum, using Amphy take a kids classes and activity online. And basically, you have much more variety than just online classes in process.
And if you look, let’s say, on the Amphy, you are in weeks, so we did a major effort to make it much more user-friendly, but not only that. We put a lot of effort also on media. So we create the most important process here. So when you go online, you will see the imported process. You will see trailer like Netflix, for example, you have video of somebody speaking about the pools, speaking about intend explaining exactly what you’re going to do during the first, so this is one thing.
Another thing that we did, we launched for mobile, what we call a story review. So basically, you can like stories, you can go and swipe between different classes, and last but not least, we also introduced exploration, endless exploration. So basically, when you scroll the website, you’re going to see like classes loading all the time, so you can never like stop getting new content and new classes as well.
So let’s take a few highlights, I would say, about the things that are changing the Amphy, but I encourage everyone, especially people who didn’t visit Amphy lately to go online, visit Amphy and see it in person. And like I said, we are planning to do a big event around it in September and officially launch the new version and other things that we started to do in Amphy is focusing more on B2B activity and B2B sales, and I’m happy to report that in Q2 already 40% of Amphy revenue actually came from B2B orders, and this is compared to 0% in Q1. So this is actually the fastest growing segment for us now in Amphy. And we have high expectation from these segments moving forward as well.
When we look at the report, and understand the results our mix, especially if you need to compare them to last year. But for us, obviously, the glass is more full than empty. And I would say equally important when we already bypassed the middle of the year and look forward for the second part of the year and actually, our outlook for the second half of the year is actually very bullish.
And these few factors that I would like to say that basically supporting our bullish outlook. Some of them are the fact that in the second part of the year, we expect much better or stronger tailwind travel activity, for example, resume now to the level that it was for us in 2019. So basically, again, there was a big sector for us, that basically was under water for the past two years and we gladly report that is now come back in full force.
And obviously, the third quarter, which is the summer holiday, is maybe the strongest quarter for travel spending, a seasonality. Again, third quarter and four quarters historically for online advertising are the strongest quarter of the year, obviously, summer spending and then the holidays in Q4. So we are turning into the better part of the year in that sense.
We also do still doing some I would say, measurement in order to keep our expenses under control and we look at, let’s say, high-level salaries, especially B-level salaries with things like currently are too high, basically, maybe we can replace the current position with I would say [indiscernible] maybe more longer and we need to work for lower salaries.
So basically, that’s some one thing the company is doing. And also when we recruit now, we are more — I wouldn’t say that we start recruitment, but we still recruit. But we are now asking us tenets sometimes even three times before we’re publishing a new position because we understand, okay, this is not exactly business as usual. But — and the company needs to also to reflect that as well.
And not only that, when we look on expenses, we try now to authorize for new special expenses. So if the topic is they stop. We don’t like to approve it anymore. And again, that should come down to lower expenses there when we’re moving into Q3 and Q4 as well.
But I would say I’m generally saying like the philosophy that happening is something that we mean during punctually, that if you’re going to be too aggressive cutting cost of putting people and allies, then actually, when it’s going to up the plant’s going to be as strong.
We’re going to be because we’re going to lack of resources. So we want to keep it under portfolio on end. But on the other hand, we know this bitness around and we are very optimistic regarding, let’s say, the coming quarters. So for us, — we want to maintain the current, I would say, expense, let me cut it down a bit.
But again, we don’t want to cut it too much because then when they are going to come, we’re not going to be able to enjoy its fruit. And other things that I would like to see, and that’s why it would make us very positive regarding future quarters. The company invested the last couple of quarters in breeding more quality growth.
If you remember, we talk about that we aim to be at around 40% to 50% gross margin. And basically, we would like to focus on, let’s say, last only quality by any cost, but also the quality of the growth. And we saw that, let’s say, the two main KPIs that is happening and if you look at indirect revenue stream and let’s say stream that the revenue coming from North America, — both of them actually are now accelerating and growing more strong than they have before. So that’s something that helps us to be a bit more bullish regarding the following process. And last, but not least, some of the new activities in the company, again, invested a lot of time and effort during the past quarter, are starting to bear fruit that this is going to contribute to the, let’s say, top line, bottom line and middle line as well of future quarter results.
So if you notice in the PR, that was the first quarter that the company give a revenue guidance for the second quarter. Usually, companies in Adcore size don’t give the revenue — sorry, for the third quarter. So usually, companies in Adcore size don’t give revenue quote, but since we’ve been around public long enough and the company is established enough, and we have a solid financial teams that can help us building now revenue models, then we can start doing that.
We’re not going to give an yearly revenue guidance, because we think it still can fluctuate a lot, but we are happy to give now at least quarterly revenue guidance, and this is like, again, that’s the first quarter that we’re going to do it.
So when we look at the third quarter outlook, actually it’s quite bullish. We believe the revenue going to be in the range of CAD 6.1 million to CAD 6.75 million. That’s a big increase if compared to the CAD 5 million or CAD 5 million a change business that we did in Q2.
Gross profit trend should be around CAD 2.9 million to CAD 3.2 million. That’s again a big increase, if we you compare it with the current gross profit number and gross margin as well, we expect them to improve to around or exceed 45%.
So the company is quite bullish regarding Q3. And I would say equally important, bear in mind that the best is yet to come. Q4 should — has always been the best quarter for us. And this is like for everybody that are in the online advertising business is the same process, I would say.
So that actually concludes my remarks. Again, I want to thank everybody who have join us today, and obviously, we’ll take any questions that you guys might have. But for us, especially the guys have been working very hard during the last quarter.
So I would say, yes, it wasn’t the best quarter [indiscernible] in comparison, but overall, we are very happy in the direction the company is going. And I can say, I’m much more happy now than I was in the beginning of the year, for example. And I think next quarter will prove us right.
So we’ll see you guys in the Q&A section, and I’m going to hand it now to Yatir.
Yatir Sadot
Thank you, Omri, and good morning, everyone. Before beginning the financial overview, I would like to remind you that the following discussion include GAAP financial measures, as well as non-GAAP results. All amounts will be presented in Canadian dollars.
Q2 was characterized by a continued acceleration of the strategy we started in mid-2021 to focus on higher-margin indirect revenue. We continue to focus on the more scalable and durable indirect channel revenue, which we believe in the long run will result in a more sustainable and profitable business.
Now let’s discuss in more detail. For the three months ended June 30, 2021, we delivered revenue of CAD 5.2 million compared to CAD 7 million in 2021, a decrease of CAD 1.8 million or 26%.
Indirect sales were CAD 1.9 million or 37% of sales compared to CAD 274,000 or 4% of sales in Q2 last year. Indirect revenues increased by CAD 1.6 million or almost 600% year-over-year.
Cost of revenue decreased by 16% to CAD 3.1 million compared to CAD 3.7 million in the second quarter of 2021. Gross profit was CAD2.1 million compared to CAD3.2 million, a decrease of CAD1.1 million or 34%. Our gross margin was between the expected range of 40% to 50% as discussed earlier this year. We expect to see an even higher gross margin in Q3, like Omri mentioned before, and even exceeding the 45% gross margin.
Moving to operational expenses. Research and development expenses for the quarter were CAD0.4 million or 8% of revenues compared to CAD0.3 million or 4% of revenues in the prior year. Sales and marketing expenses and general and administrative expenses for the quarter were CAD2.3 million or 44% of revenues compared to CAD2.6 million or 37% of revenues in 2021.
We saw two different trends. On the one hand, we saw an increase in salaries and Amphy’ investment year-over-year. On the other hand, we didn’t have financing-related costs during this quarter compared to the same period last year. Bottom line, SG&A decreased by CAD0.3 million or 12%.
Operating loss was CAD0.6 million compared to an operating profit of CAD0.3 million, this increase was mainly driven by the decrease in direct tech clients revenue and increase in research and development expenses. Net loss was CAD1.2 million compared to a loss of CAD0.7 million, a loss increase of CAD 0.5 million or 76%
On the next slide, you can see that we exited the second quarter with a strong cash and liquidity position. Total working capital of CAD10.2 million compared to CAD12.9 million at December 31, 2021, a decrease of CAD2.7 million or 21%. Cash and cash equivalents of CAD9 million as of June 30, 2029, compared to CAD14.1 million at December 31, 2021. The decrease in cash and working capital was mainly attributable to, first of all, purchasing of shares as Omri mentioned in his part.
So the first purchasing of shares was from a former officer and through the company’s buyback plan that we announced last quarter. The company sees — this is a too strategic and important investment in the company in order to drive more value to Adcore shareholders and investors.
The second reason was Amphy’s investment. We continue to support and invest in Amphy’s projects. And the third reason related to media payments related to 2021 that were paid in the first quarter of Bottom line total assets of CAD17.3 million compared to CAD22 million in 2021, a decrease of 21%. You can see that the company continues to be a debt-free company on the balance sheet.
And on the next slide, I would like to discuss the revenue breakdown. As I previously mentioned the most significant revenue trend we saw during the last quarter was the increase in higher margin in direct sales to CAD1.9 million for the three months ended June 30, 2021, compared to CAD0.3 million in the same period in 2021. This has been a key strategic focus of our, as we look to drive long-term shareholder value. Thus far, we see that this strategy is working and we reported improved gross profit on an intentionally much lower revenue base.
Our gross margin target range for the second was between 40% and 50%, like I mentioned before which we met that goal and we expect to exceed the 45 and even more during the third quarter of this year.
Now I would like to present to you the revenue mix strategy that we start pushing from Q4, 2021. So, as we can see in these 3 charts, since Q4 ’21, we’ve been experiencing an ongoing increase in the indirect revenues portion of the total revenue. from 24% in Q4, 21% to 36% in Q2, ’22 leading to a higher-margin revenue mix.
Adjusted EBITDA, our quarterly non-GAAP results reflect adjustments for the following items: depreciation and amortization total CAD 0.3 million. Share-based payment totaled CAD 0.1 million. other adjustments totaled CAD 0.2 million. And for the 3 months ended June 30, 2021, adjusted EBITDA was minus CAD 30,000 compared to CAD 1.5 million for the same period in 2021, a decrease of 100%.
Excluding Amphy’s, the market activity, adjusted EBITDA, as you can see was CAD 167,000 compared to CAD 2 million for the same period in 2021, a decrease of 92%. So on an intentionally lower revenue basis, we are transitioned to an enhanced revenue model, we were still able to report positive adjusted EBITDA on the market activity, as you can see under this slide, as our more robust scenario, margin revenue model scales and as Amphy’s goes, we are confident that we will be able to drive even better results in the next quarters.
Now with that, I will turn the call back to Barak.
Question-and-Answer Session
A – Barak Frank
Thank you. With that, we will turn the call over to questions. So Omri, first question from Collol Mojin [ph], do you intend to start providing quarterly or yearly guidance?
Omri Brill
So actually, I discussed it in my remarks. And yes, the answer is yes, the company will start and we already started this quarter to provide quarterly guidance. And hopefully that’s something that we start. We can also increase it really. But for now, we feel comfortable with providing, starting at least to provide quarterly guidance?
Barak Frank
Great. Second question also from Collol. As you continue to grow your indirect customer base, are there plans to report on other metrics like ARR or MRR customer retention, etcetera?
Omri Brill
Yes. So the company believes that currently, like we already have like a complex reporting system with MarTech, AdTech, AFE and other activities. So we don’t want to complex segment even further. So for now, we are still comfortable with the current currency reporting. Obviously, if it’s something that we would need to report or we think it’s going to contribute value to shareholders then we’re going to consider adding it in the future as well.
Barak Frank
Moving on to more questions that were sent over. What is your plan going forward with your repurchase plan? Do you anticipate continuing to purchasing shares?
Omri Brill
So the short answer is yes. And the longer if, yes, it depends. So yes, I mean, like we have enough ammo in our — ammunition in our pocket to buy more shares if needed, but it very much depends where the stock price is going to be and where the supplement is going to be. But if the company will believe there is opportunity, if the price of the stock is undervalued, then yes, we will purchase more shares we needed.
Barak Frank
Will you be profitable in Q3 based on your targets?
Omri Brill
So, we should be profitable in Q3 or at least breakeven — around breakeven in the Q3 based on our targets. But yes, like as you saw, we don’t feel comfortable enough to report, let’s say, profit or adjusted EBITDA and guidance, but to think like top line and midline is something that we are already cast enough to report, and we think that’s a good starting point. But, if you look demand then the answers, yes, we should be profitable or at least breakeven during Q3.
Barak Frank
Question that we just received from Itai Dou [ph]. What is the future for Amphy?
Yatir Sadot
So Amphy is going under a lot of changes lately. We recently launched an all-new website to Amphy. As new I would say more — more or let’s say, focused vision regarding where do we want to take Amphy. There is a lot of focus on B2B activity as well. And I think for us, we’re doing a lot of preparation in order not to grow the activity stronger in Q3 and equally important, I would say, even in Q4.
So Q4 will be a very important quarter for us in Amphy when we see that everything, the other work that we put or let’s say, the R&D time and the different efforts that we put during, I would say, the past six months, so starting to bear fruit. But ideally, we still have like — we still believe Amphy is a good investment for the company and should be — let’s say, should start driving like value for shareholders, hopefully sooner rather than later.
Barak Frank
Question for Yatir. What percentage of revenue is direct and what is indirect?
Yatir Sadot
So as I mentioned before, and let me jump again to that specific slide. The mix between indirect and direct for the second quarter this year was 36% for indirect and 64% for the direct.
Barak Frank
And while I have you, I’ll ask you another question. Did you have any revenue in Russia?
Yatir Sadot
Yes.
Omri Brill
Not sure.
Yatir Sadot
No, we didn’t have.
Barak Frank
Omri, do you feel that we are coming off a bottom here from a revenue standpoint?
Omri Brill
Yes, I think so. I think it’s not like — obviously, if I look, let’s say, [indiscernible], I would say definitely historically, Q1 and Q2 are the slowest and more challenging quarter of the year, so that almost goes without same. And b, I think like the company did go under a lot of changes starting Q4 and be focusing on a gross quality of growth — and I think for us, Q2, in a sense, about the betting. In a sense, I would expect Q2 to be even better, but that’s something we’re probably going to start seeing in Q3 is also the company put a lot of effort — and the fruit of this effort, we’re going to should start seeing in Q3 and obviously, Q4 and the moving years as well. So the answer is yes, I’m very positive and optimistic about the direction the company is going and again, you know like and I also put my money where my mouth is and I bought enough share I think this quarter, and we continue to do so if I see opportunity anyway.
Barak Frank
Another question that we just got in. How many resources are devoted to Amphy of your workers?
Omri Brill
Yes. So on — maybe Yatir can answer this one better for me, but I would say the in-house headcount is around 10 people.
Barak Frank
That’s correct.
Omri Brill
Okay.
Barak Frank
And how much of the expenses in the quarter was related to Amphy?
Omri Brill
Yatin?
Yatir Sadot
Again, Barak, can you repeat this question
Barak Frank
How much of the expenses in the quarter was related to Amphy?
Yatir Sadot
So we have another slide, specifically for that. Okay. So we invested almost – almost 500,000 during this quarter, specifically in Amphy. And I think we saw that number at the beginning of this
Omri Brill
Yes, CAD0.5 million
Yatir Sadot
Okay. So I think with that, we will conclude the Q&A session. And we’d like to thank everyone for joining us today. And we wish you all a great day and a wonderful weekend coming up ahead. So thanks, everyone.
Omri Brill
Thanks.
Yatir Sadot
Bye.
Barak Frank
Thank you.
Be the first to comment